Metals prices are under pressure. Costs remain sky-high. And disgruntled shareholders want more money back. Yet still there is a consolation for most mining chief executives: their problems are not as bad as Mark Cutifani’s.
At Anglo American, the diversified miner he has led since April, Mr Cutifani does not merely have to pep up the company’s financial performance. In South Africa, where Anglo’s roots date back nearly 100 years, he has to show political savvy to negotiate a sometimes violent environment of labour unrest and government anger. In Brazil, Anglo’s flagship iron ore project is wildly over schedule and budget.
This week Mr Cutifani, one of a cohort of recently anointed chief executives at the world’s largest mining groups, has promised his first public explanation of how he intends to improve Anglo, which underperformed its peers during the mining boom. Since 2008 Anglo’s total shareholder return has halved compared with a fall of 24 per cent for Rio Tinto and a 44 per cent increase for BHP Billiton.
“The company has not been delivering on shareholder expectations,” he acknowledges. “We need a much more commercial, value-focused mindset.”
Rivals including BHP and Rio have promoted insiders to their top jobs, arguably giving them a head start in addressing a markedly more pessimistic environment for the sector.
“He has the toughest job of any of the new chief executives and also the least familiarity with the company he is now leading, which makes his task even more difficult,” says Rob Clifford, metals and mining analyst at Deutsche Bank. “Other companies can move more quickly and concentrate on cutting costs. He has to rethink strategy, and his top team, as well.”
Mr Cutifani is an experienced Australian miner who previously headed AngloGold Ashanti and whose appointment was broadly welcomed. He has criss-crossed the globe to see as many of Anglo’s sites as possible since he took over.
Anglo should benefit from being among the world’s most diversified mining groups, with output ranging from coal and iron ore through base metals to platinum and diamonds. Last week it reported production numbers that showed better copper output offsetting weaknesses in other commodities such as coal.
However, only one-third of its mines are meeting their budget targets and in comments that are likely to be echoed on Friday, when Anglo will also produce its first interim results under his leadership, Mr Cutifani says the miner needs to be more rigorous in picking its investments.
“We have been moving projects through the pipeline too quickly and chasing the cycle. We have to invest where we can be confident of a satisfactory rate of return within a reasonable timeframe,” he says.
Anglo has a lengthy queue of projects awaiting board approval but one of its biggest headaches is the partially complete Brazilian iron ore mine of Minas Rio, a complex operation that involves pumping ore via pipeline to a seaport 525km away.
Minas Rio has already cost Anglo $8.9bn and this year Anglo wrote off $4bn post-tax on the project. It still requires about $4.5bn of capital expenditure, including for Anglo to complete the port, where it has a minority stake alongside the LLX company controlled by Eike Batista, the Brazilian magnate who is under financial pressure.
Anglo is considering a joint venture partner for Minas Rio to absorb some of those costs but this is a buyers’ market for most mining assets.
A shake-up of Anglo will unavoidably include South Africa, where the group owns almost 80 per cent of the Amplats platinum subsidiary and almost 70 per cent of Kumba Iron Ore. Part of Mr Cutifani’s pedigree for the job is his experience of the country, where he has good relations with mining officials.
While Kumba is performing relatively well, Amplats is struggling with lossmaking shafts and wildcat strikes. Most analysts think government pressure ties Anglo’s hands in fully addressing the need for cuts at Amplats: this year the company scaled back restructuring plans for Amplats after the government complained it had not been properly consulted, with Susan Shabangu, the mineral resources minister, accusing the company of “arrogance”.
Amplats now plans 6,000 job cuts, against 14,000 when the plan was first mooted in January. Mr Cutifani – who has also said this year’s wage talks are crucial for the future of South Africa and its mines – acknowledges the need to “build on our relationship with the government and make sure we have a positive influence”.
He also has to heed the mood of South African investors – notably the Public Investment Corporation (PIC), the state pension fund manager, which is Anglo American’s biggest shareholder. The PIC was outspoken in its criticism of Anglo’s performance under Cynthia Carroll, Mr Cutifani’s predecessor.
A spin-off of Amplats, however desirable from some points of view, would be complex and in any case Mr Cutifani is not yet expected to reveal his full thinking about how to deal with South Africa. His focus is likely to be on convincing investors he can eke better performance from all Anglo’s assets while being more disciplined in withholding capital from marginal projects.
Des Kilalea, analyst at RBC Capital Markets, says: “All that Mark Cutifani is likely to be able to do this week is show investors the path he intends to take. It is going to take a much longer time – two to three years – before he can really change things, and investors are going to have to be patient.”
Deutsche’s Mr Clifford says: “South Africa is clearly a very important issue but the risk for Mark Cutifani is that he gets engrossed in that and it takes up too much of his time. He needs to rely as much as possible on Chris Griffith [Amplats chief executive] to sort that out, and focus on where he can get more cash flow – be it from Chilean copper or Australian coal.”